Friday, April 01, 2016

NYTimes | PERHAPS the most complex trial in history between a sovereign nation, Argentina,
and its bondholders — including a group of United States-based hedge
funds — officially came to an end yesterday when the Argentine Senate
ratified a settlement.

The
resolution was excellent news for a small group of well-connected
investors, and terrible news for the rest of the world, especially
countries that face their own debt crises in the future.

In
late 2001, Argentina defaulted on $132 billion in loans during its
disastrous depression. Gross domestic product dropped by 28 percent,
57.5 percent of Argentines were living in poverty, and the unemployment
rate skyrocketed to above 20 percent, leading to riots and clashes that
resulted in 39 deaths.

Unable
to pay its creditors, Argentina restructured its debt in two rounds of
negotiations. The package discounted the bonds by two-thirds but
provided a mechanism for more payments when the country’s economy
recovered, which it did. A vast majority of the bondholders — 93 percent
— accepted the deal.

Among
the small minority who refused the deal were investors who had bought
many of their bonds at a huge discount, well after the country defaulted
and even after the first round of restructuring. These kinds of
investors have earned the name vulture funds by buying up distressed
debt, then, often aided by lawyers and lobbyists, trying to force a
settlement.

The
companies involved included some of the best-known vulture funds,
including NML Capital, a subsidiary of Elliott Management, a hedge fund
co-led by Paul Singer, a major contributor to the Republican Party, as
well as Aurelius Capital and Dart Management. NML, which had the largest
claim in the Argentina case, was the lead litigant of a group of
bondholders in New York federal courts.

For
a long time, Argentina refused to pay the holdouts. The funds tried all
sorts of ways to change the country’s position, including, at one
point, having an iconic Argentine ship seized in Ghana.

Then
a 2012 ruling by Judge Thomas Griesa of the United States District
Court for the Southern District of New York threw the game in the
vulture funds’ favor, ruling that Argentina had to pay them back at full
value, a cost to Argentina of $4.65 billion. NML, for example, would
get a total return of 1,500 percent on its initial investment, according
to our calculations, because of the cheap prices it paid for the debt
and because of a “compensatory” interest rate of 9 percent under New
York law.

The
ruling, which became effective in 2014, did something else: Judge
Griesa issued an injunction blocking Argentina from paying anything to the creditors who had accepted the deal until it had paid the vultures in full.

The
judge gave the vultures the weapon they needed: Argentina had to either
pay them off or renege on the default they had negotiated, ruining the
country’s credit in the future and threatening its recovery.